How to crack the loan calculator formula

Loans provide a financial cushion to the borrower. Before availing a loan, it is prudent to look at all the available options and choose the one best suitable to your needs. Loan payment calculator, available aplenty online and also with your lender’s website, lets you determine the monthly repayment amount just with the help of few criteria like loan amount, term, interest rate etc. To understand the dynamics of repayment, understanding this is a crucial step in the loan process.

The key terminology used by lenders:

Principal amount – The amount of money you borrow is called as the principle amount. Purchase price, rebates (if any), cash down payment and trade in value (if any) are the various components of the principal amount.
Loan term – The period of time that the loan will be outstanding, is referred as the loan term. Longer the term, more is the interest on the principal amount.
Interest owed on the loan – Your interest rate for one month is known as a monthly interest rate. Interest rate multiplied by the outstanding principal amount, is the interest you owe for a particular term. A loan with a shorter term has a lower interest. A larger amount of monthly payments reduces the principal amount faster, thus reducing the interest paid on the loan.
Amortization calculator – For a loan that is amortized, the borrower pays a fixed amount monthly, which includes repayment of both the principal amount and the interest owed. As time progresses, the principal amount repayment becomes larger and the interest amount lower.
Total interest paid – Subtracting your principal amount from the total value of payments, gives you the total interest paid.

A commonly used formula for loan payment is:

Monthly payment = [ r+r / ( (1+r)^ months 1) ] * principal loan amount
where r = decimal rate / 12

As with any other loan, paying a higher sum every month pays off the loan faster. While using an online loan calculator, please be aware of the following:

Use this tool only as a planning guide. The final figures need to be worked out with your lender.
Results are based on a standard repayment plan where a fixed amount is paid every month for the duration of the loan.
If you are planning to use other repayment plan options, a separate calculation has to be done for the same.
Please note that the interest rates vary from lender to lender and depend on eligibility.
Many calculators do not factor in any fees that may have been included in your loan.

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